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Copper Piggy Continued



March 27, 2008 – Comments (4) | RELATED TICKERS: GG

I was falling asleep at the keyboard, so I didn't finish looking at Goldcorp, which I still don't have much good to say about.

With 711 million shares as the latest count in the report and 2.6 million ounce guidance (which history has proven to be lip service), well, it takes 273 share to buy one ounce of production.  The way Goldcorp reports its guidance, it uses cash costs which means when they say $250/oz costs they are averaging in all their base metal and silver production into their gold costs rather than doing an allocation of costs to each kind of metal produced.  The result is that many investors miss this and they double count the other production in their assessment of the stock.  I've had debates with many defenders of Goldstock and they consistently demonstrate a poor analysis and understand of the fundamentals by coming back with, "but the silver production is going up," or something else that is already counted in the guidance, but well hidden by this method.

They have a new mine starting production this quarter, Penasquito.  Oh goody, they are bragging like crazy that they found 3 million more ounces at Penasquito.

What a farce that one is.  In 2006 the grade was 0.55 g/ton on average for the 9.99 million ounces in their reserves.  Now the grade is 0.48 g/ton and it is for 12.4 million ounces.  How they get a 3.1 million difference out of that, well there has never been anything about the way they do math that makes sense to me, so more of the same.  But, notice the garbage grade of gold.  It seems to me at that kind of grade, especially when you are trying to separate out other metals, recovery rates are lower.  Alumbrera, for example, with its 0.48 g/ton grade has had recovery rates in the 50-60% range. 

So, not only do the reserves not add up, the average grade has declined 13%.  I did an analysis on what happens to costs as grade declines, and the lower the grade, well, you get into a hyperinflation of costs, the ability to fudge projection in costs and recovery to make it look good is enormous, much the same way the homebuilders did their projections.  Floridabuilder had an excellent post early about how homebuilders can make something work on paper by simply fudging the numbers a little.  It works the same for a mine.

They've sold off their Silver Wheaton investment for $1.6 billion this year.  They need this cash to build those replacement mines that they fail to put aside a contigency for from their earnings, which should be a red flag for investors.  A mature company should be funding all of their operations.  In 2005 they cashed in all their warrants and completely cleared their debt.  With something like 10 mine operating, if this was a company worth anything close to valuation investors are giving it, they wouldn't need to borrow everytime they build a new mine.  They've managed to rack up over $1 billion in long term debt since then.

Selling off Silver Wheaton is going to give them a good quarter and I predict that investors won't be looking closely and will falsely attribute the good quarter to gold going up in price.  They will have about 600,000 ounces of production this quarter and say the average price of gold is up $200/ounce over 4th quarter.  That gives an extra $120 million in revenue for the quarter.  That completely pales to the gain the sale of Silver Wheaton will bring in.  And voila, you have an incredible option cashing out opportunity as earnings have a single quarter spike, and many investors will fail to appreciate that Goldcorp now gets zero gain from the price of silver as they still have contracts to sell their silver for about $4.30/oz.  I didn't check to see if they have any unhedged silver production.

Their new mine at Penasquito is massive.  The lead and zinc that they will apply as cash costs will help to maintain the "low cost producer."  Barrack applies costs on a per metal basis so it is nonsense to compare costs between the two industries, and the more base metal you become, as in Goldcorp, the lower your costs look.

I was incorrect about Penasquito start-up being this quarter, as I went from the past lip service and did not check to see how that's coming along in reality.  They are now projected to start up in the 4th quarter, with full production in late 2009.


4 Comments – Post Your Own

#1) On March 27, 2008 at 10:06 AM, dwot (29.67) wrote:

Well, if this isn't the dumbest report I've read all year...

I think the rich will have done well if they maintain, never mind gain.

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#2) On March 27, 2008 at 4:53 PM, ATWDLimited (< 20) wrote:

Well, I think I may cash in this quarter, and lock in my gains, thats what I was going to do any way, but good advice.

BTW, be shore to check out my silver blog. 

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#3) On March 27, 2008 at 7:01 PM, dwot (29.67) wrote:

ATWD, I suspect that GG will go up further...  Gold can do little wrong right now...  But, long term GG will be a disaster for investors.

They have 43 million ounces of reserves, 710 million shares, so only 0.06 oz gold reserves per share.  They have 1.5 oz silver reserves/share, but @$4/share, or what ever the hedge is.  They have 2 pounds copper/share in reserves, 20 lbs zinc and 8 lbs lead.  In the ground I think valuing this at more than about 1/10th spot price is crazy.  So $60 gold, $6 silver, $7 copper, $20 zinc and $10 lead, so $103 of reserves per share.  Any way I do valuation on this stock I come up with about $10/share -- every time.

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#4) On March 27, 2008 at 8:29 PM, abitare (29.90) wrote:

Great job, dwot. Great post.

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